Taxpayers who face IRS levies often find themselves in tax trouble for understandable reasons. Sometimes you simply weren’t aware of your tax debt, or it seemed too small an amount to worry about.
Often, an IRS levy can come after years of financial hardship, as experienced by this taxpayer:
“I started working as a 1099-Misc since 2011 and … did not pay quarterlies or the amount due… Some years I barely made more than $23k gross and was struggling already with credit card debt… Now I am staring down seven years of back taxes, two of which I didn’t even file for yet, and a Final Notice of Intent from the IRS. Every time I try to sit down and get it straightened out I feel a panic attack coming on and I don’t know what to do.” (Reddit user)
Whatever your case, when the IRS levies, it’s a harsh wake-up call. That’s because a levy is one of the most powerful collection tactics at the disposal of the IRS. It is certainly more extreme than an IRS lien.
Through their rights to levy, the IRS can legally seize your assets to pay a tax debt, usually from your wages or bank account.
And a levy doesn’t typically just happen once. The IRS will keep seizing funds until:
- You make an agreement with the IRS to pay back taxes,
- The amount of overdue taxes you owe is fully paid, or
- You can arrange to have the levy released.
That means, without action, the financial pressure of a levy won’t let up.
Here, we’ll explain what happens in an IRS levy and what you can do — including, how to get a levy lifted faster than you might expect.
Are You at Risk of an IRS Levy?
If the IRS believes you owe outstanding tax payments and you haven’t dealt with the debt, you may be at risk of a levy.
This is true even if the IRS assessed your debt incorrectly. If you don’t address their claim, the IRS will intensify their collection activity, often culminating in a levy.
It’s IRS policy to notify you several times before they implement the levy (i.e., seize wages, other income or money from your account). Of course, sometimes these notices go astray, for example, if you’re not at the address the IRS has on file.
The series of notices includes five automated letters with notice numbers CP14, CP501, CP503, CP504, and L1058/LT11. The last of these is a final notice of intent to levy.
You should act quickly with professional help when you receive notices from the IRS.
Steps the IRS Takes to Apply a Levy
Ideally, you can prevent the levy from ever happening when you respond to an early notice.
If you don’t receive the notice or don’t respond, before the deadline in the final notice, the IRS will typically impose one of the following forms of levy.
IRS Wage Levies
A wage levy comes straight from your paycheque, as the name suggests. The IRS will reach out to your payroll department and you’ll be asked to fill out a form (form 668-W).
The timelines are tight, as this quote from a Reddit contributor illustrates:
“Wednesday I received a notice of a levy from the payroll lady at my job (form 668-W). It states the IRS intends to try to collect on a total debt of over $17,000. I have until Monday to complete this and return it.”
No one wants their employer made aware of a tax problem. But when it happens, the embarrassment is often secondary to the panic of facing a sizably reduced paycheque.
An amount from your paycheque will be exempt from the levy. However, it may not be enough to cover your costs.
The portion of your wages exempt from the levy is calculated based on a standard deduction and the number of dependents you are allowed to claim. If you don’t return the forms to the IRS within three days, they can take the maximum amount from your pay. That’s because they’ll calculate your exemption as if you are married, filing separately, and have no dependents.
Note also that any bonuses or commissions you are owed can be claimed by the IRS in full. These are over and above the exemption.
Again, a wage levy is not a one-time occurrence. You should address a wage levy immediately to minimize the long-term impact on your income.
But what if you’ve received notice of intent to levy and you aren’t an employee?
IRS Levies of Contract Income
An increasing number of US taxpayers are contractors and thus, we see more cases of IRS self-employment income 1099 levies. The IRS can identify, contact and claim payments owed from contract work.
You may at first assume the IRS has mistaken your client for your employer, like this contract worker:
“I owe back taxes because I barely make any money in my only income from cleaning offices. I just had a client call me saying the IRS contacted him to levy any income I make from them. It isn’t a job. I’m an independent contractor. That’s not right to mess around with people’s business like that and they never notified me at all first that they were going to contact my clients. I thought first they’d notify me they were going to take money from my bank.” (FreeAdvice user)
Accounts receivable are fair game for the IRS, and they don’t make fine distinctions here. Your client will typically receive Form 668–W(ICS) or 668-W(C)DO, as would an employer. They are required by law to turn payments you’re owed over to the IRS.
Like a wage levy, a levy of client income hits with a double blow: your reputation and your financial life are thrown into crisis. However, if you address the issue immediately and professionally, your standing with clients can be salvaged. Other business owners understand that taxes are complicated and will respect you for getting professional help.
IRS Bank Account Levies
Bank levies can be the most surprising and sudden. One day the money is in your account and the next it’s gone, as this contributor to Free Advice notes:
“Friday evening my wife calls me and informs me that out bank/savings account, the one in both our names, has been frozen and levied. There’s only about 600 bucks in there… But, what we had in there was for food/grocery/bills for the next two weeks.”
The IRS isn’t limited to levying your chequing accounts. They can also levy funds in retirement accounts and dividends from investments.
If your bank was levied but you didn’t get notification of intent to levy, you may no longer be at the address the IRS has on file. And yet, the IRS can track down your bank account with surprising accuracy.
Bank levies, like all levies, are continuous. Until your debt is paid or you’ve made arrangements, the IRS will continue to seize funds from your account periodically.
Feeling Overwhelmed?
Other IRS Levies
The IRS has far-reaching powers to collect taxes assessed as owing. They can levy any property or right to property that you own or have an interest in.
In addition to wages, self-employment income and bank account holdings, this includes:
- Rental income
- The cash loan value of your life insurance
- A wide range of federal payments, including contract payments
- Some federal salaries and certain benefits, including retirement benefits
The IRS can also seize and sell property that you hold, including vehicles and real estate. If the back tax is owed by your businesses, the IRS can seize and sell business assets.
Typically, an IRS levy of wages, income or a bank account gets immediate attention from taxpayers before the sale of assets becomes a real prospect.
When Living with a Levy Isn’t an Option
Most people can’t afford to live without their entire paycheque and count on the money in their account for food, housing, transportation and other daily necessities. A levy leaves taxpayers with too little.
There’s nothing reasonable about a levy, as you can see from these Reddit user comments:
“The levy is going to leave me with a few hundred dollars per month. I will be unable to pay rent and evicted pretty quickly. I won’t be able to afford a bus pass and will be unemployed.”
“I have no big assets and no savings. I am supporting a household of 5 (plus another $600/mo in child support, plus other related expenses) on my salary of $74k and can’t afford a big monthly payment, let alone letting them take $2400 out of my paychecks every month like the payroll lady thinks they would.”
Even if your only option is to pay the tax debt in installments, you can negotiate livable monthly payments. Read on to learn more about your options when faced with an IRS levy.
What You Can Do About an IRS Levy
An IRS levy can feel like a crisis, from the first notice letter to the day money is seized. The hardest part is not knowing what to do next, or whether you can even stop the levy. Tax law is complicated and the IRS doesn’t make it easy.
The only way to know what the IRS will accept is to begin negotiating immediately. You should have a trusted tax professional represent you. Often, we can get a levy lifted in just 24-hours.
The IRS will accept alternatives to levying your wages, other income or account. But we must prove that you are committed to paying or cannot pay your back taxes.
That may mean making a lump sum payment, if you’re able, or negotiating an installment agreement. For others, it may be possible to negotiate an Offer in Compromise, IRS Hardship Status or prove that your tax debt has expired.
To learn how we can help, start with a no-obligation, free consultation now: 1-855-212-5900
Or click here to request a callback
